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Should Alphabet Inc's Google Challenge Qualcomm Inc In Mobile Chips?

Will Google start making its own mobile chips to challenge Qualcomm?

Alphabet's (NASDAQ:GOOG)(NASDAQ:GOOGL) Google is talking to mobile chipmakers about building processors and components based on its own specifications, according toThe Information. Those specs reportedly include more powerful camera sensors and support for next-gen motion sensors used in virtual and augmented reality apps. That move, similar to Apple's (NASDAQ:AAPL) dramatic redesign of its own ARM based chips, would help Google reduce hardware fragmentation across the Android ecosystem and guarantee that its top-tier devices can remain competitive against iPhones.

Source: Pixabay.

The report didn't name specific chipmakers, but it's highly doubtful that Qualcomm(NASDAQ:QCOM), the largest mobile chipmaker in the world, will help. That's because letting Google dictate its designs could make its chips identical to chips from its ARM-based rivals. That would encourage commoditization, which it already faces with cheaper rivals. Therefore, Google is probably talking to underdog chipmakers like MediaTek and Rockchip, which could be more willing to sacrifice individuality to gain a Google "stamp of approval" on their processors. While that strategy makes sense, it could be tough to execute.

How Google handles hardwareGoogle is generally unwilling to accept the overhead risks of manufacturing mobile hardware. It offered Android to OEMs for free to dominate the mobile market without manufacturing handsets. To gain a branded presence, Google designed Nexus devices which were manufactured by various handset makers. In emerging markets, where Android fragmentation is severe, it introduced Android One phones which were built to its specifications by other handset makers. It notably strayed from this strategy with its acquisition of Motorola Mobility, which was so disastrous that it reinforced the idea that Google shouldn't manufacture mobile devices.

The problem with this strategy is that hardware makers get tired of Google expanding its ecosystem on their backs without taking the risks. That's why so many Android OEMs recently agreed to pre-install Microsoft mobile apps on their devices. It's also why the Android One push, which required partners to run stock Android, is losing momentum. Since low-end Android smartphones are already sold at such thin margins, blocking OEMs from monetizing the devices with their own services was an unpopular move.

Google would be applying the same strategy to chipmakers by asking them to adhere to design standards for Google-branded chips. However, Google could also follow Apple's footsteps and ask Samsung and TSMC, which both own their own foundries, to manufacture its chips. But this approach, which requires it to fully research and design its own chips, will be much more costly. That move would also turn it into Qualcomm and MediaTek's direct competitor.

What's the matter with Qualcomm?It might seem strange for Google to challenge Qualcomm, but the chipmaker has fallen behind the tech curve over the past two years. Two years ago, Apple introduced the A7, the first 64-bit ARM-based CPU to be shipped into a mobile device. Qualcomm didn't start sampling its first 64-bit chip, the Snapdragon 810, until the third quarter of 2014. Unfortunately, the 810 was plagued by overheating issues, which convinced Samsung(NASDAQOTH:SSNLF) to replace the Snapdragon with its own Exynos processors.

Source: Qualcomm.

Qualcomm claims that the Snapdragon 820, its first custom-designed 64-bit chip, will rectify those mistakes and be more powerful than Samsung's top-end Exynos 7420. Samsung is reportedly ready to give Qualcomm a second chance -- South Korea's Electronic Times claims that the 820 will be installed in the upcoming Galaxy S7 in "some markets." Therefore, Qualcomm might have slipped, but it's still considered a "best in breed" mobile chipmaker.

Does challenging Qualcomm make sense?Last year, Qualcomm controlled 52% of the smartphone application processor market, according to Strategy Analytics. That share will likely decline as MediaTek and its other competitors catch up. But as margins decline, the quality of chips could become inconsistent and impact the reputation of Android devices.

Looking ahead, there are two options for Google. First, it can take the "Android One" approach to these chips and convince multiple chipmakers to put aside their differences and manufacture Google-branded chips. Second, it can ask foundries to manufacture its own chips. But if it does that, it becomes a direct competitor against Qualcomm, MediaTek, and other Android chipmakers. In addition to hurting those relationships, Google could further fragment Android's hardware base with a new class of chips.

This isn't the first time Google has considered designing its own chips. Back in 2013, Google reportedly considered designing ARM-based data center chips, a market which Qualcomm only recently entered. But Google never moved forward with those plans, likely due to the dominance of x86 chips in data centers. Moving into mobile chips could be just as tough, and not a decision the tech giant will take lightly.

Leo Sun has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Apple, and Qualcomm. The Motley Fool owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Leo is a Tech and Consumer Goods Specialist who has covered the crossroads of Wall Street and Silicon Valley since 2012. His wheelhouse includes cloud, IoT, analytics, telecom, and gaming related businesses. Follow him on Twitter for more updates!